The U.S. economy is looking pretty good right now, at least if you're an American Express (AXP +1.75%) cardholder. The credit-card company released a fourth-quarter earnings report this week that demonstrated that it's in the midst of a sustained recovery from its early-pandemic troubles, fueled by the record spending of its cardholders. Management also said it expects that pattern to continue in 2022. The stock, which had dipped ahead of the report, rose on the news.
A complete rebound
American Express had a difficult time during the initial phases of the pandemic, even more so than its peers. That's because it has an unusually strong focus on travel and entertainment, two segments where spending plummeted during the lockdown stages of the crisis, and which still aren't quite back to normal levels.
Image source: American Express.
American Express began to show signs of recovery in the second quarter of 2021, and the improvements continued through the rest of the year. Revenue increased 30% year over year in Q4, and was also 7% above Q4 2019 levels. For the full year, revenue was up 17% over 2020, but was still slightly below 2019's level. Record cardholder spending was focused on goods and services, but travel and entertainment spending was still below pre-pandemic levels.
In the latest quarter, the company set aside another $53 million net in provisions for credit losses -- a contrast to Q4 2020, when it released $111 million from its reserves. As American Express' loan balances increase, it's expecting total delinquencies to creep up as well. However, for the full year, reserve releases helped net income increase. Net income was a record $8.1 billion, which included $2.5 billion from credit reserves it released as the macro-environment improved and fears of defaults diminished.
"Our investment strategy enabled us to reach record levels of Card Member spending, maintain customer retention and satisfaction above pre-pandemic levels, increase new Card acquisitions, grow our loan balances, and deepen our digital engagement with customers," Chief Executive Officer Stephen Squeri said in the earnings press release.
The company also announced a quarterly dividend increase of 20% to $0.52, which gives the stock a yield of 1.2% at its current price of about $172.
More good times to come
On top of these reassuring signs, management said that it expected higher revenue throughout 2022, powered by an improving economy and investments in its business. The company expects the top line to rise by 18% to 20% for the year, and management forecasts earnings per share in the $9.25 to $9.65 range. That would be a slight decrease from the earnings per share of $10.02 it reported in 2021, largely due to the fact that 2021's massive reserve release won't be repeated. Longer term, it anticipates revenue growth of about 10% and EPS growth in the mid-teen percentages.
The company has tweaked its strategy in recent years, retaining its elite customers while branching out to capture more of the millennial market and expand its small-business segment. Its global consumer retention rate was 98%, new card acquisitions reached 2.7 million, and the number of new fee-based premium card accounts opened nearly doubled year over year. Millennial and Gen Z customers accounted for 60% of those new card members. American Express also made some acquisitions and improved its technology to meet the needs of small businesses; 2021 was a strong year for small-business account additions as it made moves that helped cement its reputation as a financial technology company.
Card fees for the full year increased 10% to $5.2 billion, a figure that was also 28% higher than 2019's result, and management expects that growth to accelerate this year. Card fees represented 12% of total revenue, providing a fairly stable recurring revenue source as well as an indicator of customer satisfaction.
Management expects multiple tailwinds for the business in the coming year, including an increasing resumption of travel, a general economic recovery, and higher net interest income from loan balances.
A differentiated model
Squeri made an interesting comment about the buy now, pay later trend that's becoming popular in the financial services industry. Such products, he said, are not targeted at American Express users. "That's just not how we play our game," he said when asked about buy now, pay later as a potential disruptor for its credit-card business. American Express has a clear and differentiated strategy that works for it and gives it an edge.
Investors can expect a great 2022 for American Express as it benefits from the economic recovery. Management is also running a tight ship: It remained profitable throughout the spending declines of the previous phases of the pandemic, and its fee income provides it with a financial cushion in any environment.
American Express stock trades at 18 times earnings, higher than a typical bank, but only half that of credit-card processing giant Visa's price-to-earnings ratio of 36. In a period of stock market volatility, American Express stock can give your portfolio both stability and growth potential.
